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# Resource Capital Corp. Message Board

• exdivy exdivy Jun 11, 2010 2:49 PM Flag

I already posted that one could draw a line through these dividend rates, as the stock price goes up to see what rate they would be missing out on by waiting:

\$5.00 = 20%
\$5.25 = 19%
\$5.50 = 18%
\$5.75 = 17%
\$6.00 = 17%
\$6.25 = 16%
\$6.50 = 15%
\$6.75 = 15%
\$7.00 = 14%
\$7.25 = 14%
\$7.50 = 13%

If we just look at the most recent high of \$7.55, this is the percent of Price Appreciation one would miss out on by waiting until the stock reached \$7.55:

\$5.00 = 51%
\$5.25 = 44%
\$5.50 = 37%
\$5.75 = 31%
\$6.00 = 26%
\$6.25 = 21%
\$6.50 = 16%
\$6.75 = 12%
\$7.00 = 08%
\$7.25 = 04%
\$7.50 = 01%

So, a buy at say \$5.75 (give or take a few cents) would equal 31% price appreciation with a 17% dividend rate.

Amazingly, if the stock were to go to \$10 within a year (very reasonable), that same buy would be worth 74% in appreciation and 17% in dividend for a 91% return on investment in one year.

Where can one invest their money in this market for this type of return with this type of security: RSO has NEVER failed to pay a dividend, and as LIBOR rises RSO makes even more money?

In deference to those who believe I am always a bit too optimistic, I expect the dividend to be greater than \$0.25 a year from now and didn't even mention that - or did I just mention it?

GLTA

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• Somewhat difficult to purchase much ONAV-- very low volumes right now. Almost everyone is hanging on to their shares it appears.

• Thanks.

Agree that ONAV is a misunderstood, deep value opportunity. A screaming buy at today's prices. ONAV is priced today like RSO was priced March '09.

It really didn't seem very bold to me to buy RSO after the secondary was announced. I bought all the way down: at \$6.25, \$5.69, \$5.59, \$5.58, \$5.17, \$5.02 and \$5.03. At this point, I'm very much in the green on those purchases in the aggregate. I imagine that by this time next week, I'll be green on every single purchase.

GL

• Nice post.

Any chance this stock goes back to \$3 or \$4 if the financial unravel with European?

• Agreed, at \$6 it is still a bargain. I just found it funny how some didn't find it an amazing buy at \$5.1 just a little while ago. I guess markets can often stay irrational though, just look at ONAV...Great buy at \$3 and yet it dropped down to \$2.1?!? Nutty.

Ah well, more profit for us to make when rational market prices return. I feel like this is a gift giving us a second shot at 2009-like returns.

-Fernando

• My pleasure. Glad to help.

I'm confident RSO will be a great medium to long-term investment.

Of course, it is hard to predict moves in the short term.

At \$6, it is a bargain. At \$8, it wouldn't be quite as exciting.

• Thanks. I appreciate your explanation. I'd known NLY and MFA owned agency REITs but was too lazy to connect the dots as to their relative risk to RSO.

Still, my take is that market sentiment rules price as much as balance sheet fundamentals. My guess is that RSO will take a hit when the Fed starts signaling upward leaving more savy guys like yourself the opportunity to buy more at lower prices.

The short answer is credit risk. RSO's borrowers and investments are all private. NLY, MFA etc. are agency mREITs. If 10% of RSO's borrowers in each CDO quit making their loans payments, there wouldn't be anything left for RSO equity holders. This default risk just isn't an issue with agency paper.

You accurately point out that NLY, MFA and other agency mREITs may be crushed when short-term interest rates go up. Their business model is to borrow short and lend long.

Also, I should clarify the mistatement in one of my earlier posts. About 80% of RSO's assets and liabilities are variable, LIBOR-based, and the balance are fixed.

So when RSO's interest expense goes up (based on increasing LIBOR) its income goes up (also based on increasing LIBOR).

RSO doesn't face maturity risk (which killed TMA, for example) and it doesn't face interest rate risk. However, it does face borrower default risk.

RSO and NRF both have had phenomenally low customer defaults, compared to their peers and lenders in general. They seem to have been the kings of underwriting.

• "The vast majority of RSO's capital is match funded or will outlast its investments. The vast majority of the rates it pays for its capital are fixed.

Increasing rates will not harm RSO."

Great to know, thanks. I tarred RSO with the same brush that MFA and NLY gets. I regret the error.

But this begs the question, if RSO's costs are fixed, then what is your explanation as to why the market prices RSO with a higher yield than NLY and MFA?

• >>It is a dead certainty that the yield curve will tighten when the economy stabilizes and the Fed ratchets rates up. That RSO will manage that eventuality well is a risk I'm not willing to take and is probably a major reason why the shares trade with such a rich dividend.<<

The preceding sentences are evidence of a lack of understanding of RSO and its capital structure. These comments would apply to NLY, MFA and some others, but not to RSO.

The vast majority of RSO's capital is match funded or will outlast its investments. The vast majority of the rates it pays for its capital are fixed.

Increasing rates will not harm RSO.